The writer is co-founder of Centerview Partners
The US economy is slowing down. The main dispute among economists is whether we are in for a soft landing or a hard one, and the pessimistic perspective has dominated headlines.
But while it is clear that we are in for a difficult period ahead, there is also reason to believe that the American economy is primed for a renewed period of expansion in the years that follow. Most observers tend to view today’s economic challenges through the prism of past downturns. But the US economy operates differently today than it did 40, or even 14, years ago.
For a start, the private sector has become more innovative, nimble and proactive in managing through change and uncertainty. Think back to March 2020, when the pandemic caused a near-complete shutdown of global commerce. Thanks to the data, tools and strategies business leaders now have at their disposal, instead of economic Armageddon we embarked on a period of robust growth. (Government policy, of course, played an essential role here.)
Executives were quick to overhaul business practices to continue operations. Balance sheets were fortified, remote work was enabled, new technologies were adopted. At the most agile companies, capital investment increased in order to boost competitive positioning.
The US labour market is also in better shape today than at the onset of past downturns. June’s strong employment numbers underscore this. While hiring freezes and lay-offs are likely to result in economic pain for many, workers can today more easily and quickly find new employment opportunities thanks to flexible work-from-home options. According to a study by real estate group CBRE published last year, nearly 90 per cent of America’s largest employers plan to continue offering hybrid work policies into the future.
Today’s economy is also more dynamic and entrepreneurial. Yes, technology valuations have come down as they have been analysed more rationally. But in the five years ending in 2021, new business formation was a third higher than the preceding five-year period.
And we’ve learnt in the decade or so since the recession that followed the financial crisis that economic models do not capture intangibles such as the willingness of a company to continue strategic capital investments through an economic slowdown. As companies reported second-quarter earnings this year, many chief executives adopted proactive belt-tightening on operating expenses but continued high levels of capital investment. Doing otherwise, they know, undermines longer-term growth.
Finally, the economy’s prospects are buoyed by government policy. The bipartisan infrastructure plan will provide more than $100bn of infrastructure investment in each of the next five years. The landmark Inflation Reduction Act, narrowly passed last weekend, will help ease inflationary pressure. The US banking system is stable and sound. In the wake of continuing supply shocks, manufacturers are proceeding to onshore production and build duplication into supply chains. And though interest rates are rising, they are starting from a historically low level — 0.25 per cent, which is 95 per cent lower than the average starting rate of the previous four cycles of rate increases by the US Federal Reserve.
To be sure, there are risks, from geopolitical instability to rising polarisation, that could impede government effectiveness and, in turn, hurt business confidence. But the US is better positioned for growth than the current economic debate concedes. Look beyond the immediate economic clouds on the horizon — and consider the agile private sector, evolved and improved labour markets and culture of innovation and entrepreneurship — and the long-term forecast may even look sunny.